BzeTSX

I was having a converstaion with my boss the other day, and he mentioned that he cuts his morgage payment duration by almost a year or more every few months by paying half at the begining of the month and half at the end. He says that this reduces the principal so you wont be paying as much interest. I was skeptical because I thought the loan was preplanned. he said to try it with my car and see.

rmjjensen

meaning if his mortgage is 3k a month he pays 1.5k at the beginning of the month and then another 1.5k at the end of the month? how could it help to send two seperate payments when they sum up to the same value?

jwood_06TSX

In theory, if his mortgage payment is at the end of the month and he pays half of it in the beginning of the month, then it decreases the total amount that will be taxed (interest) for when he pays it at the end of the month. However, you would have to have your mortgage set up so that you can make additional payments with no additional fee and so that the principal doesn't still get calculated based on the total regardless of the addiontal payments.

BHF

I pay my mortgage every 2 weeks. You get the benefit mentioned above of hitting the principle a couple weeks early, plus one extra payment a year. It calculates out to cutting a 30 year mortgage by 6 years...

dom

Exactly, Bi-weekly payments.

Not sure if thats available on car loans though.

rb1

This will help some - paying 1/2 the mortgage early will reduce the amount of interest paid on just 1/2 the payment amount for 1 month. This is really just a few dollars (at 6%, a months interest on $1500 is just $7.50).

However, this means that that $7.50 goes to reduce the principal, so you never pay interest on that $7.50 again. I think he is overstating the overall benefit -- he might shave just a few years off the 30 year mortgage. I'd have to run the numbers to be sure.

Over 30 years, the power of compounding is amazing. Over a 4 or 5 year car loan, it doesn't help much.

If there is no pre-payment penalty, here is my favorite example that illustrates the power of compounding over over a long period of time.

Say you start with a 30 year mortgage, and the payment is $1000 per month.

Each year, you add 4% to the amount you were paying the previous year. In year 2, you pay $1040/month. (Note that this alone blows away the measly $7.50 reduction in the principal in the "pay 1/2 early scheme" we were talking about above. You are reducing the principal an extra $40 per month each month in just the first year).

In year 2, you pay $1081.60, in year 3 you pay $1124.86, etc.

If you are getting regular raises, ponying up a little extra each year is easy in a gradual way like this, but what does it get you? How long does it take to completely pay off a 30 year mortgage doing this?

12 years

Anyway, paying extra saves big time on interest money on a long mortgage, but not so much on a car.

However, it's not necessarily the wisest use of your money. For example, if you're in a 30% overall tax bracket, that 6% costs you only 4% out of pocket. You're better off investing that $40 in a balanced stock portfolio than you are paying off your mortgate. As long as you net more than 4%, you'll have a bigger pile of money at the end even if you wait 30 years to pay off that mortgage.

jwood_06TSX

It is working for my car loan i got when i bought my new 06 TSX through Honda Financial Services. They allow you to make unlimited payments without penalties!


rb1 - Thanks for the informative post

jwhite4

I also have my 06 TSX financed thru Honda Finance. However, I got it at their promo 2.99% rate. Any extra money I have goes into a money market fund that pays over 5%, so no reason to prepay. Same with my HELOC loan used to pay off the rest of my house. It's a less than 5%, so again no reason to prepay.

Jeff

dodgers1

http://www.bankrate.com/brm/auto-loan-calculator.asp

Thy this site. It helped me to figure how much extra I needed to pay in order to pay off my last car in 4 years instead of 5. Which helped me save about $700.00 in interest.

Reach

Well, I didn't get the special rate, and my interest is just over 5% on my loan. To me it makes sense to pre-pay. I pay my car loan and mortgage bi-weekly, and though I haven't 'realized' any savings on the mortgage yet, I know I will long term.

I am hella far ahead on my car payments tho. I've also been overpaying it since I didn't get a great rate on it and I'd rather that loan be over.

jwhite4

At 5% it's close to being a wash - any extra money you have: if applied to the loan, would save you 5%; if deposited in a money market account, would earn you 5%. There are other factors as well: the 5% loan rate is fixed, whereas the 5% M/M rate can vary. Also, you'll pay taxes on your earned interest, so that reduces the rate (though with a good M/M, you can earn above 5%).

The way I sort of figure it, having that extra money readily available in a M/M fund is worth the miniscule savings I might see by prepaying the loans. It all depends on what your financial condition is.

Jeff

jwood_06TSX

See, since i didn't have much credit, i wasn't able to get a good rate. I hardly ever using credit cards, i hate them, i only have a credit limit of $2k and the only thing i have going for me was my short period of school loans and cell phone bill. So my rate was like 6.2% through Honda so i am going to be paying that off ASAP otherwise i will end up paying an additional $9XX. I only financed like $5000, so its not bad anyway. But yea, i def see what your saying about the %'s being lower to put it in the market. See, my student loans are locked in at 4.75% so it almost even at what i would make in a money market so i am just trying to double pay those as well.

jwhite4

I think in general "paying of a loan early" in almost every case is a wise thing. However, when you start doing more detailed analysis such as, "paying a loan biweekly vs monthly", in our current economic condition, investing vs paying also needs to be looked at. I don't believe it's typical that short term (ie. Money Market) rates can be more than long term loan rates.

If you can find a decent money market that pays a higher rate than your loan rate, and you have the self-control not to spend that extra money you are saving, you can make it work.

My car loan was only for 3 years, and my HELOC 10 years, so in some sense I'm already on an accelerated payment schedule. If I had a 5yr car loan, or a 30yr mortgage, I'd probably think differently.

Jeff

xjohnkdoex

iTrader: (2)

i've actually been meaning to call honda financial about just paying a large sum of my loan off. does anyone know what their policy is regarding this?

i've also heard of the pay twice/month on your mortgage to pay less interest. it's true.

synthetic

This is a very simple accounting concept and anyone with a mortgage/loan should be aware of it.

ZAXDude

jwood --

in today's new car environment, 6.2% is a "good" rate; it's not an excellent rate, but it is "good". if it were 7% or more? definitely getting out of the good territory.

given your car loan is only $5k, and depending on your credit situation (don't know your FICO scores and such), you might do well with playing the 0%, 1.99%, 2.99%, etc. balance transfer game to make your $5k totally interest free or almost interest free.

you shouldn't "hate" credit cards. they can be managed and used wisely for one's benefit. you can use them to your advantage to build your credit profile to have a high score, which will in turn translate into $$ savings down the road when you need to take out a loan and get an "excellent" interest rate.

i wish i owed only $5k on my '06. i'm working on it tho'...

taz98spin

You should do that, there is no early payment penalty.

My dealer actually recommended doing that.


I have a 10 grand, 4 year loan, @ 3.1 APR and already paid off 6.5 grand
within 9 months.

I plan to pay off everything by my cars 1 year b-day which will be
in May!

rb1

Again, putting extra money into that loan is the same as "investing" your money at 3.1%.

Would you buy a CD now that only paid 3.1%? Not likely. You're better off investing that money in a conservative mutual fund that could net you between 5-10% annually depending on how conservative it is.

If you had held that $4,000 or so extra you have put into that loan in the first year and could earn 7% on it, 4 years from now that $4,000 would be worth $5243., for a net gain of $1200+.

How much would it have cost you to "borrow" that same $4,000 for 4 years at 3.1% (or in other words, how much did you save by paying this amount in the first year?). Less than $300.

This general idea is the same with any loan. Paying extra on the loan is the same as investing at the same net (e.g. "out of pocket") interest rate. If you can deduct the interest like you do on a home mortgage, then the net or effective rate is lower than the nominal rate.

Paying down a loan early doesn't make sense financially until the interest rates get higher than what you can earn elsewhere on the same money. The lower the interest rate, the less sense it makes.

jwood_06TSX

I can understand that, but when i say "hate" credit cards, i just don't like the thought of buying something when i really don't have the money, ie. use a credit card! I only use them for emergencies, or if i know i have money coming soon and i'm being greedy in wanting something....lol.

I thought about doing that, but honestly, i will most likely be able to pay it off by the end of the year

As i meant to ask them what my credit score was, but i forgot....i'll have to find out what that is sooner or later!

I only owe $5k because i had the 04 TSX my uncle GAVE me as a graduation gift that i traded in. It had 3 accidents on it from his ownership period of 2.5 years, and then i got hit pretty bad and just had to get rid of it. They gave me $17k for it and i put another 3k down so that is why its so low

bosmet

what's the largest amount a credit card company will let you transfer over at 0% or 2% (or less)?

my loan is the total 28k price and i'm at 3.99%

i have money to take out a large chunk of it but i would earn more than that in a 1yr term cd. probably 4.5% given the tax applied i think paying getting rid of the loan is a good thing. guess i didn't think it all the way through.

also i heard that if you pay a big chunk early the amount in the monthly payment doesn't go down at all like a credit card does right?

ZAXDude

It's a combination of the limitations the credit card provider has in place for 1) you as a borrower, and 2) the terms applied to your type of card in general.

One thing to consider is that 2% of 28k is 560 bux. 2% of the outstanding balance is a minimum a lot of card issuers require you to pay each month. If you were able to get a 0% interest on one card for 28k or say between two cards @ 14k each, will you be able to pay that amount? Also, most of the 0% BT's are limited -- for 9 months or a year or 15 months. Some are for life, but there are usually some restrictions that require you to make one purchase a month on the card (no minimum purchase amount -- just buy a pack of gum or something!). So to effectively keep your interest to the bare minimum or at 0% until paid off, you likely will have to transfer the balance from one card to another a couple of times over the course of a few years.

Be careful of the "BT transfer fees" too. Some cards have 0% transfer fees, some have flat amounts, and others have a percentage up to a certain amount. The best ones are the offers with no BT fees....or with a very low maximum (I got an offer just last week from Discover for 0% for 18 months with a maximum $29 BT fee).

This might sound confusing, but it's really not. It's definitely not for everyone, but if you have a good FICO (about 700-720+), don't already have a lot of credit card debt, and have the income to support high credit lines you should be good to go.

cardoffers.com is a really good place to look for the best offers available currently on credit cards. If you sign up for a credit card via their website, many of the offers will also give you a monetary sign-up bonus payable by cardoffers. It's a great resource.

bosmet

went to that site to check out different offers.

all of them (5 that i checked) charge you an up front transaction fee of 3%!!!

that does me no good at all if i'm getting charged that up front. i might as well keep the 3.9% and not deal with the 12month deadline.

ZAXDude

I haven't checked, but keep in mind those 3% BT fees are many times capped with a maximum of $75 or $90, etc. It's good to read the fine print on the offers to make sure... The BT fee will also usually incur interest charges over the life of the BT b/c the CC companies apply your payments to the 0% BT first and leave the BT fee to accrue interest. Pretty tricky of them! There are usually ways around this too, one of which is to simply call the CC issuer and ask them to waive the fee. You'd be surprised at what you'll get for asking!


here's one for a year @ 0% for BT's with no transaction fee through Citi:

Citi

use offer code F1A6, and it expires 3/15/07.


here's one for a year @ 0% for BT's with a max $29 BT fee through Discover:

Discover

user offer code FCTB

the max $29 BT shouldn't bother you; you easily pay more than $29 a month in interest on your $28k loan at 3.9%. this BT fee is a one time shot up front (although keep in mind as the standard practice you will most likely be charged interest each month on by Discover, but it shouldn't be more than a few dollars spread over the course of a year)

DuckDodgers

Just be careful HOW you make bi-weekly payments.

There are several ways to do it, and some are a scam. There are companies that offer to do the bi-weekly thing for you...take your money by direct debit..and keep it till then end of the month. They reduce your payment because you effectively make 13 payments a year...the two months you make three bi-weekly payments to them, they pay the extra at the end of the NEXT month along with the normal payment. They get your money to draw interest on for a portion of the month.

Example: Your bi-weekly falls on March 5th and March 19th...they get your money that day in each case and send your whole payment in electronically on March 28th or 29th. So if your car payment is $400 a month, they get $200 on the 5th (23 days of interest...assume 5% simple...roughly $0.63) and $200 on the 19th (9 days of interest...roughly $0.25) and send off $400 on the 28th. They net $0.88 that month from you, you save nothing. The two months you make an extra payment, the get the cash for a longer period, making more money. Since the earliest you can make the third payment on a bi-weekly scheme is the 29th of the month, they'll never pay it out that month. That's even more money for them.

You think $0.88 a month is chump change...OK, lets say they have "just" 5000 people signed-up (most of these "scammers" are just other names for one of a couple of firms), that's $4400 a month (or $52,800 a year for a little computer time each day, sign me up!)...no mail costs, just the cost of using your bank's electronic bill payment scheme (often free for electronic transfers) and your time.

My take...do it yourself. As long as there a no prepayment penalties (check, you'd be surprised) send in an extra few bucks every check (and check to see if you have to specify to credit against Principal...some loans default to prepayment of finance charges!) and enjoy an early payoff.

BTW, the above auto bi-weekly thing is common in the mortgage area too...and the numbers are much bigger! If you are making bi-weekly payments and they are being creditied immediately, you should turn your 30 year loan into about a 21-22 year loan! Anything less means they are making more money off you!

DuckDodgers

Not completely true. You have a number of other factors to consider (If you are facing a reduction in pay, retirement, if your job is uncertain, etc). Also, the prepayment is a return certain, any other investment is subject to some degree of risk (from US Bonds (almost nil) to penny stocks (sky high)) and the return is thus, uncertain.

A common example of this is in the realm of mortgages. A person planning on retiring in 20 years is well advised to make early payments on his new home's 30 year mortgage. The single best investment any individual can make is entering retirement without a housing payment...this has remained true and will continue to do so.

rb1

Nope.

I can prove that in any of the above cases (even a retiree) is better off carrying the loan as long as they are investing the money they didn't put into the loan at a higher effective rate of return than the loan costs them. This is always true.

When I say "better off", it means that they have more $$$ after paying off the loan than they would at the same point in time had they paid the loan off earlier.

You may not have the same "income" in the form of a salary, but you can make the loan payments from what you invested rather than originally pay into the loan, and you still come out ahead.

People are more comfortable not having loans as they get older, but that doesn't make paying them off earlier the smartest decision financially.

jswim99

Also, be careful for this "catch" with the credit card balance transfers: many of the CC companies will apply all payments to the lowest interest rate debt that you have. This means that if you get a new card with a $10000 BT, and you buy something else with the card, you will pay interest on your individual purchase until you pay off the BT (this could be very significant). Best approach is to get a new card for the BT and never use it for anything else.

DuckDodgers

Your own words (highlighted in red) make my point . Again, I'm pointing out a return certain versus a potential return (risk). Average rate of return is just that...for instance in a 6 year period, returns of -10%, -10%, -5%, -5%, 0, and +100% equal an average return of about +6.5 to 6.6%. But, for instance, if you are investing for those first 4 years, you take a beating versus paying off a car note early.

I'm not disputing the advise of invest the difference ...ideally, people should lease their car and invest the difference between their lease payments and what their purchase payments would have been...but in the real world, certain returns should be taken in certain situations. The impact of risk tolerence is absent from your plan, and is very present in the market. Most people experiencing a down period bail-out versus riding-out...a sub-optimal act that can decimate your returns. For example, missing only a few of the top return days in a stock market can cut your return over a multi-year period almost in half! But people are risk averse!

Myself, I pay down my highest term and highest interest loans early...but I've also got about 15% before taxes going into investment vehicles. It's a form of asset management...that's a portion of my fixed return segment.

rb1

If you assume the stock market, then this is somewhat true.

One post above mentioned early paying on a loan with a 3.5% rate. Paying that off early is silly because there are investments that guarantee a rate of return better than that loan, by almost 3 percentage points (certificates of deposit).

It makes good financial sense to pay down higher interest rate loans, especially credit cards, but there are fewer instances in which you can justify paying off lower interest rate loans, especially if they are tax deductible.

bz268

That won't work anymore. When you pay more a month, instead of subtracting the extra from the principle, they subtract the extra from the next month's payment.

So, if you pay $500 a month, and pay $600 for this month, you will pay $400 the next month. The $100 extra won't go to the principle.

Acurasrule

This is somewhat true.... This might not be every bank, but most work like this: If your payment is 500 a month, and you send 600, your right, it does not go towards the principal, just lowers next months payment etc.


However, you can usually send in a check that is marked in the memo area as "principal payment" and that will be applied to your principal, but like I said, it has to be sent seperate from your regular payment, and it is also to a different address. (At least for JP Morgan Chase)

dodgers1

Well regarding paying off a car early. I did in the beginning write a second check that said principal reduction but when I was so ahead in the payment I just wrote one check with the additional payment. Since I started to pay more every month from the first payment after awhile I was over 6 months ahead of a due payment.

DuckDodgers

Prefer almost always, but OK.

Again, allowing for risk (nothing is 100%, but US Gov Bonds are close), correct. the 3.5% is almost always gonna do better investing, but I read your comments as more sweeping. If you didn't intend that, I apologize for the misunderstanding.

Yea, but most people overstate the value of the tax deduction. You have to remember that the first portion of you tax deductable amount is simply covering the same ground as a standard deduction and is thus NOT of any tax value until it exceeds that amount. Thus people who figure their payment is actual some x% less because of tax deductions are almost always overstating their savings.

rb1

Hmmm.

In any state that has a significant income tax, the state tax alone can exceed the standard deduction for an upper middle class income. Moreover, the property tax alone on homes can easily exceed the standard deduction in the city in which I live.

I agree the standard deduction muddies the water and you can't make a blanket assumption regarding the value of the tax deduction, but in cases like this it's quite fair to claim the whole "x% less" with regard to the "out of pocket" cost of mortgage interest or interest on a home equity loan.

kipsy

i got 3.9 financing thru honda, then the dealer offered a bi-weekly option that will cut 6 months off my 5 year loan, hence a 4.5 yr loan now. basically 1 extra payment per year (automated- so i cant cheat) and 1 extra payment covered somehow gets me out 6 months early.

bz268

So, you didn't have to pay for the next 6 months?

Reach

No, this is what we were talking about earlier in the thread. By paying bi-weekly, you are staying in advance of the terms of your loan, and paying off principle ahead of schedule. by the END of the loan (not beginning) you have paid off a significant amount of principle ahead of time, which you then don't have to pay interest on.

The savings equals about 1 month's payment per year, depending on your loan rate and terms, or in this guy's case, about 6 months over 5 years. But remember, you're 'investing' money ahead of time into your car to do this. It may (probably) be better served in a money market.

DuckDodgers

Yep...that's what I get for living in Texas for 19 years...what is this state (or city, for that matter) income tax of which you speak? The point you make is correct, but don't forget your deduction varies on filing status. In Texas (with no state income tax) the best money columnist did the numbers to prove a house below 150K ain't worth anything as a tax savings to a married couple.

Actually, now that I write that, it reminds me of how it chaps my ass that the middle of the country (in general) is subsidising the coast's property values through tax deductions that are much less valuable in low cost of living areas. In CA and the Northeast, the high property prices mean a giant write-off on your taxes...one that we in the middle don't get.

Reach

Easy, buy a bigger house!

Trust me, I know I could get a mansion in TX for the cost of my *townhouse* outside DC. What chaps MY ass is how much we nor'easterners have to pay for real estate! You win some, you lose some.

dodgers1

Yes. For example in June 04, my bill would say next payment due December 04. But I didn't wait because I was paying the loan offer early.
FYI, my loan was through Bank of America.